There were two important reports on the U.S. economy released this morning. First, the services sector purchasing managers’ index (PMI) from Markit Economics fell to 51.2 in May, significantly worse than expected and one of the weakest headline readings of the recovery. Under the hood, service providers reported the slowest rate of job creation in more than two years, and overall business optimism fell to the lowest reading since 2009. Some surveyed managers said that growth has been held back recently by “a cyclical slowdown in investment spending and continued unwillingness among clients to commit to new projects.” Chris Williamson, chief economist at Markit, added that “A deterioration in the survey data for May deal a blow to hopes that the US economy will rebound in the second quarter after the dismal start to the year. … Having correctly forewarned of the near-stalling of the economy in the first quarter, the surveys are now pointing to just 0.7% annualized GDP growth in the second quarter, notwithstanding any sudden change in June.”
Elsewhere, the U.S. Federal Housing Finance Agency’s (FHFA’s) national home price index (HPI) rose 0.7 percent in March (lagged), more than expected. This resulted in a 1.3 percent gain for home prices in the first quarter of 2016, a significant slowdown compared to the 5.7 percent growth seen in Q1 2015. However, home prices still lifted in every state between Q1 2015 and Q1 2016, and the top five states for annual appreciation were Oregon (+11.8 percent), Florida (+11.2 percent), Washington (+10.9 percent), Nevada (+9.4 percent), and Colorado (+9.0 percent). Moreover, home prices in America have now risen for nineteen consecutive quarters, a long-term uptrend that has been one of the main drivers of consumer inflation in recent years. Some economists like to compare the HPI to the owners' equivalent rent section of the monthly consumer price index (CPI) report from the U.S. Bureau of Labor Statistics to help spot price bubbles. As the last chart below shows, home values have increased significantly in recent years but remain below the extremes seen prior to the “Great Recession.” Going forward, relatively low mortgage rates, tight supplies, and continued improvement in the labor market should all be supportive of higher home prices.
Sources: Econoday, Reuters, Twitter, ZH, Markit Economics, U.S. FHFA, FRBSLPost author: Charles Couch